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Ross Systems v. Linden Dari-Delite Inc.

Decided: June 30, 1961.


No. A-112: For affirmance -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall and Schettino. For reversal -- None. No. A-113: For reversal and remandment -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall and Schettino. For affirmance -- None. The opinion of the court was delivered by Proctor, J.


This is an appeal and cross-appeal from a judgment of the Appellate Division affirming denials by the Chancery Division of the plaintiff's claim for specific performance of a franchise agreement and the defendants' counterclaim for charges paid in excess of the contract price. The Chancery Division, on its own motion, adjudicated the cancellation of a lease which the court held was integrally related to the franchise agreement; and the Appellate Division remanded that part of the cause for further judicial inquiry as to the terms upon which the cancellation should be based. Since there was a dissent in the Appellate Division, the appeals are here as of right. R.R. 1:2-1(b).

The facts necessary to understand the issues raised on this appeal are set forth in the opinion of the Appellate Division, 62 N.J. Super. 439 (1960), at pages 442 through 445, as follows:

"Plaintiff is a partnership consisting of three brothers named Levin residing in Illinois. It is in the business of 'franchising and selling' equipment to retail ice-cream stores to be operated under the trade name 'Dari-Delite.' In 1952 Charles R. Dann was appointed plaintiff's exclusive agent in New Jersey. Plaintiff brings

this action to enforce compliance by the defendant Linden Dari-Delite, Inc. ('Linden' hereinafter) with a franchise agreement dated April 12, 1954, under which Linden was authorized by plaintiff to sell Dari-Delite ice cream from a location at 446 Wood Avenue in the City of Linden. Dann was designated a 'Third Party' in the agreement, with the right to supervise compliance with its terms by Linden and to 'take over' the contract in the place of Linden upon default by the latter. By an amended complaint plaintiff also seeks reformation of the agreement so that it will be declared intended and effective for a term of ten years. Dann is not an individual party to this action. An understanding of the defense and counterclaim, and of the disposition of the matter by the trial court, from which both sides have appealed, requires detailing the somewhat complicated factual background of this controversy.

On March 8, 1954 Dari-Delite of New Jersey, Inc., a corporation apparently owned and controlled by Dann, entered into a lease as tenant for certain store premises at the Wood Avenue, Linden, location above referred to for a term of ten years. The property was subleased April 2, 1954 to Linden at the same rent as the principal lease and for the balance of the same term. At the times of all the transactions thus far mentioned the proprietary interest in Linden was vested in Dann and one Winfield R. Scott. However, no ice-cream business was actually conducted by Linden at the Wood Avenue location until the defendant Samila came into the picture, as about to be related.

On March 31, 1955 Samila purchased the stock of Linden from Dann and Scott for the sum of $10,500, intending to conduct the Dari-Delite ice-cream business under the franchise and lease aforementioned through the instrumentality of the Linden corporation. He did so until May 21, 1958, when Linden, through counsel, notified plaintiff by letter of its termination of the franchise agreement and advised it to remove its personal property from the premises. It appears from the complaint and pretrial order that defendants' basic grievance against plaintiff was that Dann, who as plaintiff's agent had the function under the agreement of designating local suppliers of the ice-cream mix which Linden was required to use, had made a side-agreement with the supplier for a rebate or commission to Dann which caused the price to Linden to be inflated correspondingly and beyond the contemplation of the agreement. The only payments to or on behalf of plaintiff stipulated in the agreement were 25 cents per gallon of mix and 3 cents per gallon as dues to the National Dari-Delite Association. But by Dann's side-agreement with Farmland Dairies, made February 15, 1957, Farmland paid him $500 in cash and agreed to pay him a commission of $1 per can (ten gallons) and 25 cents per can 'to be used to help increase the output of cans of mix in the Dari-Delite Stores of New Jersey.' This extra $1.25 per can (or $1 -- the proofs are not clear) was added to the basic price and included in the gross price for which Farmland

billed Linden. Linden claimed to have overpaid about $1,000 for ice-cream mix to Farmland because of the Dann commissions.

It was Linden's position in its answer that this conduct by Dann entitled it to terminate the agreement, and the counterclaim sought recovery of the excess payments thus exacted from it.

At the conclusion of the testimony of the defendant Samila at the trial, the trial judge, on his own motion, raised the question, not theretofore made a point of issue by defendants, as to whether plaintiff had not violated the franchise agreement in the material respect of failure to provide ice cream of an 'exclusive' formula. He finally held that there was such a breach by plaintiff and that the plaintiff was therefore not entitled to enforce the agreement, thus eliminating the issue of reformation. He intimated the view that the evidence would have warranted reformation if the agreement were to be held enforceable. The court dismissed the matter of the excessive payments by defendant on the basis that they were made knowingly, and, therefore, voluntarily. It went one step further, however, holding that since the franchise agreement was terminated the lease from Dari-Delite of New Jersey, Inc. to the corporate defendant must also be terminated, as the 'franchise and the sublease are part and parcel of the same transaction and are inseparable.' Plaintiff was given leave to join Dari-Delite of New Jersey, Inc. as a party to effectuate a judgment to the stated effect in respect to the lease."

The Appellate Division held that (1) the franchise agreement should be reformed to accord with the parties' intent that the agreement and the related lease run for a concurrent period of ten years; (2) the franchise agreement did not require plaintiff to provide defendant with an "exclusive mix" and therefore plaintiff's failure to provide such a mix was not a breach of the agreement; (3) the overcharges resulting from the commission agreement between Dann and Farmland had the effect of increasing the price which the parties to the franchise agreement contemplated defendants would pay for its mix and therefore constituted a material breach of the franchise agreement; (4) defendants could not recover on the counterclaim the amount of past overcharges because they had knowingly ...

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